BMI will sell six daily slots for takeoff and landing at London’s Heathrow airport to British Airways as Deutsche Lufthansa AG seeks to restructure the unit.
Lufthansa Chief Executive Officer Christoph Franz said this week he was considering selling unneeded BMI slots at Heathrow as the airline explores strategic options for the unprofitable U.K. division, including a sale. Lufthansa and BA declined to comment today on the transaction price.
BMI controlled 8.2 percent of takeoff and landing positions at capacity-constrained Heathrow before the sale, making it the biggest operator there after BA. The BA purchase increases the likelihood BMI will be broken up, rather than sold as one unit, said Stephen Furlong, an analyst at Davy Stockbrokers in Dublin.
“It would seem unlikely that it would be bought in its entirety as a single company,” Furlong said today in a telephone interview. “I wouldn’t put any significant value on BMI. I don’t think it’s worth much without the slots.”
Takeoff and landing positions at Europe’s top hub are so valuable that three years ago Continental Airlines paid $209 million for four pairs. BMI’s portfolio there is worth as much as 460 million euros ($622 million), Citigroup Inc. analyst Andrew Light said in a note prior to today’s announcement.
Lufthansa, Europe’s second biggest airline, rose as much as 18 cents, or 1.9 percent, to 9.44 euros and was up 1.4 percent to 9.40 euros as of 10:13 a.m. in Frankfurt trading. The shares have dropped 43 percent this year, valuing the Cologne, Germany-based carrier at 4.3 billion euros. BA parent International Consolidated Airlines Group SA was up 2.5 percent in London.
Lufthansa has been considering a BMI sale after the division racked up 223 million euros in operating losses following a June 2009 takeover. The deal was forced on Lufthansa when BMI founder Michael Bishop exercised an option to dispose of his stake. Since then, BMI has cut 800 jobs and 10 planes in a push to revive profit or make the business easier to sell.
“I’m not convinced that anybody would want to buy BMI as a whole and then have the problem of restructuring it,” said Chris Logan, an analyst at Echelon Research & Advisory in London. “BMI doesn’t have a strong brand and the business is loss making, so I’d imagine there will be more emphasis on selling the slots.”
Lufthansa spent about 350 million pounds buying BMI, including an initial stake bought in 1999, the purchase forced by Bishop as airline stocks fell during the global slump and the acquisition of a minority holding owned by SAS AB.
BA will start using the slots purchased from BMI at the end of next month to expand its long- and short-haul network, the airline said in a statement today.
“We’re always looking to increase our slot portfolio at Heathrow,” Laura Goodes, an IAG spokeswoman, said by phone today. The purchase increases BA’s control of Heathrow slots by 1 percentage point to 45 percent, she said.
Lufthansa this month installed Vagn Ove Sorensen as BMI’s chairman, and Stefan Lauer, who manages the group’s subsidiary airlines, said in a Sept. 9 statement that the Dane’s “experience with corporate restructuring is of particular importance and value to the company in this crucial period.”
BMI differs from other Lufthansa-group airlines in that it’s the No. 2 carrier at its home hub, and with “a substantial gap,” Lauer has said. Lufthansa or its units are the biggest carriers at hubs in Frankfurt, Munich, Zurich and Vienna, which makes a “huge strategic difference,” he said.
“There’s only one way for Lufthansa to solve the BMI issue and that’s an exit from the business,” Furlong said. “It doesn’t make strategic sense for them.”
BMI has its headquarters at Castle Donington, near Derby in central England, and is made up of three businesses -- British Midland International, based at Heathrow, low-cost unit bmibaby, which serves European tourist destinations from Birmingham, Manchester, Cardiff and East Midlands airport, and BMI Regional, which operates smaller planes and is based in Aberdeen Scotland.
The company has 57 aircraft, with two-thirds leased and therefore easier to get rid of should it be broken up, according to data from aviation consultant Ascend.
The main British Midland International operation has a network of predominantly European and Middle Eastern routes, which prompted an operating loss of 120 million euros in the first half as Arab unrest had a “severe impact” on traffic.
“The slot sale won’t have an impact on BMI’s flight schedule,” Lufthansa spokeswoman Stefanie Stotz said by phone.